GERMAIN (2007) Global Finance, Risk and Governance

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Global Finance, Risk and Governance

Randall D. Germain
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Global Society, Vol. 21, No. 1, January, 2007
Global Finance, Risk and Governance1
RANDALL D. GERMAIN
This article puts forward three linked sets of claims. First, it argues that Robert W. Cox’s
Downloaded by [Australian National University] at 04:43 31 December 2014
framework of historical materialism can be adapted to articulate a suitable conceptual

schema for understanding financial governance at the global level. Second, it emphasises
how globally oriented financial institutions have increasingly become purveyors of “risk
products”, with the effect that modalities of financial governance have been altered
towards a more market-oriented and globalised form. Finally, it considers the extent
to which Cox’s claim that the structure of world order is becoming non-hegemonic
can be illustrated with respect to the implications of governance outlined above. The
argument pursued in the article is that institutional changes make possible a shift in
the modalities of financial regulation, away from an emphasis on rules geared towards
specific activities and more towards procedures targeted at the actual capacities of finan-
cial institutions and towards the development of a more fully globalised policy frame-
work. The future of financial governance has thus become more globalised in scope
and our conceptual understanding of governance should reflect this development more
adequately.
Introduction
A lively debate has developed over the past few years within the disciplines of
International Relations and International Political Economy over attempts to
chart the changing modalities of global financial governance.2 This literature
has developed in response to two concrete historical problems. First, a series of
1. The author would like to thank Katie Lavelle, Kevin Young and Bob Cox for valuable comments
on an earlier draft. All errors, however, remain those of the author. Thanks are also due to Bart Paudyn
for providing research assistance with the preparation of this article.
2. A representative sample of this growing literature would include David M. Andrews, C. Randall
Henning and Louis W. Pauly (eds.), Governing the World’s Money (Ithaca, NY: Cornell University Press,
2002); Leslie Elliot Armijio (ed.), Debating the Global Financial Architecture (Albany, NY: State University
of New York, 2002); Jacqueline Best, “From the Top Down: The New Financial Architecture and the Re-
embedding of Global Finance”, New Political Economy, Vol. 8, No. 3 (2003), pp. 363 –384; Louis W. Pauly,
“Good Governance and Bad Policy: The Perils of International Organization Overextension”, Review of
International Political Economy, Vol. 6, No. 4 (1999), pp. 401 –424; Tony Porter, “Technical Collaboration
and Political Conflict in the Emerging Regime for International Financial Regulation”, Review of Inter-
national Political Economy, Vol. 10, No. 3 (2003), pp. 520 –551; Susan Strange, Mad Money (Manchester:
Manchester University Press, 1998); and Geoffrey Underhill and Xiaoke Zhang (eds.), International
Financial Governance under Stress: Global Structures versus National Imperatives (Cambridge: Cambridge
University Press, 2003).
ISSN 1360-0826 print=ISSN 1469-798X online/07=010071–23 # 2007 University of Kent

DOI: 10.1080=13600820601116542
72 R. D. Germain
financial crises in developed and emerging markets during the 1990s revealed the
actual and potential vulnerability of all economies to the undesired consequences
of systemic disruption. In these circumstances it became impossible for public
authorities to evade their responsibility for the sound organisation of financial
systems. How to govern these systems in the public interest therefore became a
pressing political problem with a functional global dimension due to the increas-
ingly integrated nature of the world’s financial systems.3 Second, changes in
financial markets and the institutions participating within them proceeded
apace during this time, making the practical and technical aspects of financial gov-
ernance more complex and difficult to achieve. The growth of financial conglom-
erates, the expansion of financial markets, the increase in capital mobility, the
erosion of barriers between different kinds of financial activities, financial inno-
vation, the liberalisation of financial markets and for many countries also the
capital account all make the question of how to provide financial governance in
a rapidly evolving and globalising environment highly topical and technically
complicated, yet deeply imbued with political implications.4
This article analyses the implications that these developments hold for our con-
ceptual understanding of financial governance, broadly construed. Where gov-
ernance is understood to revolve around setting the rules and establishing the
boundaries by which certain practices are undertaken (in this case, financial trans-
actions), changes in the objects of governance—financial institutions—alter the
modalities through which governance is delivered. The argument developed
here is that changes associated with the emergence of the “new global finance”
have transformed financial institutions into purveyors of “risk products”, with
two important implications for how we understand financial governance. On
one hand, such institutional changes make possible a shift in the modalities of
financial regulation, away from an emphasis on rules geared towards specific
activities and more towards procedures targeted at the actual capacities of finan-
cial institutions. This change enables state regulators to demand that financial
institutions should regulate their own actions. On the other hand, a policy frame-
work is developing so that the structure of financial governance is increasingly
incorporating a strong global character. While the history of financial governance
has been primarily national in scope, it is now becoming increasingly global in
orientation, and our conceptual understanding of governance must reflect this
development.
The article proceeds in three steps. The first section outlines the conceptual
building blocks necessary for acquiring an understanding of financial governance
and locates a suitable theoretical framework within the historical materialist per-
spective of Robert W. Cox. The second section examines the elements of the “new
global finance”, focusing especially on the way in which packaging, costing and
allocating risk has come to define the practices of globally oriented financial
3. Morris Goldstein, The Asian Financial Crisis: Causes, Cures and Systemic Implications (Washington,
DC: Institute for International Economics, 1998); Barry Eichengreen, Toward a New International Financial
Architecture: A Practical Post-Asia Agenda (Washington, DC: Institute for International Economics, 1999);
Carla Hills and Peter Peterson, Safeguarding Prosperity in a Global Financial System: The Future Inter-
national Financial Architecture (Washington, DC: Institute for International Economics for the Council
on Foreign Relations, 1999).
4. Jacqueline Best, The Limits of Transparency: Ambiguity and the History of International Finance
(Ithaca, NY: Cornell University Press, 2005).
Global Finance, Risk and Governance 73
institutions. The final section explores the implications of this development for
how we understand the contemporary exercise of global financial governance.
Finance and Governance: Conceptual Building Blocks

Causal Forces
The world’s financial resources are linked together through a complex, overlap-
ping and heterogeneous set of connections most often collectively described as
the “global financial system”. How this system is governed presents a puzzle to
scholars of monetary and financial affairs. For some, governance is opposed to
government and corresponds loosely to the relatively spontaneous form of
order that arises out of the exercise of authority in a competitive and relatively
anarchic environment.5 For others, governance is more concretely identified
with the imposition of rules and guidelines on market operations by organised
public authorities.6 For many scholars, however, governance is best understood
as the contested interplay between market actors and public authorities—or
markets and states—that establishes the rules and boundaries within which
global financial resources are mobilised and channelled towards economic,
social and political activity.7 Such is the definition adopted here; governance is
centrally concerned with setting rules and establishing boundaries within
which particular types of activity occur, and by which patterns of behaviour
become instantiated within a broader political, economic and social order. This
should be seen as a definition of governance rooted in the tradition of historical
political economy, which sees institutional developments growing out of the
current structural features of world order.8
So defined, how governance gets done—by whom and to whom—becomes a
puzzle to be explained. The main reason for this lies with the many and competing
causal forces that drive financial governance, whose specific forms of agency are
manifested in different ways depending on the historical context through which
global financial transactions are undertaken. We may identify four principal
causal forces at work, each with multiple derivative formulations—states and
inter-state relations, market relations, institutions and classes (or collective
social forces).
States and markets are the two most easily identified causal forces. States in the
form of governments are crucial causal forces because they provide the overarch-
ing legal framework within which financial transactions occur. Through more
specialised public-sector agencies—often with statutory independence from
5. James Rosenau, “Toward an Ontology for Global Governance”, in Martin Hewson and Timothy
Sinclair (eds.), Approaches to Global Governance Theory (Albany, NY: State University of New York Press,
1999).
6. Rodney Hall and Thomas Biersteker (eds.), The Emergence of Private Authority in Global Governance
(Cambridge: Cambridge University Press, 2002), Ch. 1; Robert Keohane, Governance in a Partially Glo-
balized World (London: Routledge, 2002), pp. 202–204.
7. See, for example, the collection of essays in Aseem Prakesh and Jeffrey A. Hart (eds.), Globaliza-
tion and Governance (London: Routledge, 1999); Hewson and Sinclair, op. cit.; John Eatwell and Lance
Taylor, Global Finance at Risk: The Case for International Regulation (Cambridge: Polity Press, 2000).
8. As discussed, for example, in Robert W. Cox, Approaches to World Order (Cambridge: Cambridge
University Press, 1996), pp. 144 –148, 237–240; and Charles S. Maier, In Search of Stability: Explorations in
Historical Political Economy (Cambridge: Cambridge University Press, 1987), pp. 2– 8.
74 R. D. Germain
central government but operating under a strictly defined mandate—they also

provide the expertise and day-to-day supervision that ensures these legal frame-
works become and remain operative. Public authorities also act as lenders of last
resort to the financial system, either legally by making central banks responsible
for systemic stability, or politically by being democratically accountable to their
citizens for appropriate levels of economic activity within the country. In the
event of financial collapse, in other words, historically it has been governments
rather than markets or specific private financial institutions that have assumed
the burdens of systemic responsibility.9 It is for this reason that we can identify
public authorities as comprising an essential building block of financial
governance.
The centrality of states is reinforced if we examine the role that international
politics plays in the formulation of the rules and boundaries of the global financial
system. Here what is crucial to focus on is the manner in which the main features
of international politics—the pursuit of national interests by states, the spill-over
effects of national security considerations, alliance politics, colonial and imperial
ventures, war and the myriad other concerns traditionally associated with the
high politics of statecraft and diplomacy—also have “knock-on effects” in terms
of the organisation of the global financial system. The operation of the pre-1914
balance of power together with the spread of imperialism, for example, had a
determining effect on which spheres of interest would be open to the influence
of British capital, while the security perimeter of the United States in the aftermath
of the Korean War dictated which parts of the world’s economy would be pene-
trated by American capital in the 1950s and 1960s.10 Even the resolution of the
international debt crisis of the early 1980s played itself out within the established
geopolitical confines of Cold War politics.11 Whether considered in terms of state –
society or inter-state politics, public authority is an active, critical element in the
provision of financial governance.
Financial markets are another clearly recognised causal force that provides gov-
ernance to financial systems. Financial markets bring together savers and bor-
rowers, or the providers and the consumers of credit, to coordinate their
continuing economic activities. In aggregate terms, markets thus impose a collec-
tive discipline on what individual savers or borrowers can expect to achieve,
thereby governing the behaviour of financial and other kinds of firms in line
with the relationship of supply to demand.12 To the extent that financial
markets are global in orientation, they become less amenable to the actions of indi-
vidual agents except under highly circumscribed situations. In large and deep
global markets it is rare for monopolistic or oligopolistic conditions to be
achieved, particularly over any appreciable length of time. It is in this sense
9. Charles P. Kindleberger, The Financial History of Western Europe, 2nd edn (Oxford: Oxford Univer-
sity Press, 1984/1994); Barry Eichengreen, Elusive Stability: Essays in the History of International Finance,
1919– 1939 (Cambridge: Cambridge University Press); Randall D. Germain, The International Organiz-
ation of Credit (Cambridge: Cambridge University Press, 1997); Paul Langley, World Financial Orders
(London: Routledge, 2002); Louis W. Pauly, Who Elected the Bankers? (Ithaca, NY: Cornell University
Press, 1997).
10. Herbert Feis, Europe the World’s Banker: 1870–1914 (New York: Augustus M. Kelley, 1930/1964);
Germain, op. cit.; Langley, op. cit.
11. Susan Strange, States and Markets (London: Pinter, 1988), Ch. 5.
12. Philip G. Cerny, “Webs of Governance and the Privatization of Transnational Regulation”, in
Andrews et al. (eds.), op. cit., pp. 197–198.
that we can say markets exert a kind of governance over financial transactions, by
virtue of the collective limits to the kinds of activities they tolerate or encourage.
But while public authorities engage in an active or prescriptive form of govern-
ance through the provision of rules and guidelines for behaviour, markets
engage in a more passive form of governance, by establishing the (constantly evol-
ving) boundaries within which financial transactions must take place. Neverthe-
less, they too should be seen as an essential building block of financial
governance.13
Financial governance, however, relies on more than a combination of state and
market activities. Individual financial institutions and the associations they form
to raise their profile, synthesise and disseminate congenial standards and
practices, and represent their views to public authorities, are also critically
involved in the governance process. Institutions should be seen as a principal

causal force of governance precisely because it is their actions that are the object
of governance, and the way in which they undertake to perform financial trans-
actions can support, extend, erode or actively undermine existing modalities of
governance. The distinction made here between markets and institutions is
subtle but significant. While markets work to discipline individual firm behaviour
and establish collective limits to what they can do, it is the structure and organis-
ation of these institutions themselves—and how they respond to the governance
incentives provided by states and markets—that in large measure determine the
success or failure of specific governance arrangements.14 Individual institutions
are a key source of innovation within financial markets, which in turn means
they are a significant driver of change in the financial system. Such an important
role—for the largest financial institutions at any rate—demands that they be con-
sidered an essential building block of financial governance.
States, markets and institutions always operate within historically specific
social structures or formations. These determine the broad outlines of the relation-
ship between states and markets, or public and private authority, as well as the
degree of freedom and latitude for international institutions at definite historical
junctures. The precise way in which these causal forces are embedded in social
formations varies over time, and one way to chart this variance is to direct atten-
tion to the prevailing configuration or balance of class forces.15 This configuration
is therefore the fourth principal causal force at work in financial governance. Class
relations, while complex and variegated, provide clues to who pays the costs and
reaps the benefits of organising financial transactions in particular ways, and help
to illuminate the principal providers and consumers of credit at specific points in
time.16 They also help us to understand the evolving trajectory of capitalism and
13. Two exponents of this view are Barry Eichengreen, Globalizing Capital (Princeton, NJ: Princeton
University Press, 1996) and Benjamin J. Cohen, The Geography of Money (Ithaca, NY: Cornell University
Press, 1998). For a countervailing view see Eric Helleiner, The Making of National Money (Ithaca, NY:
Cornell University Press, 2003).
14. Jonathan Perraton, “What are Global Markets? The Significance of Networks of Trade”, in
Randall D. Germain (ed.), Globalization and its Critics (London: Palgrave, 2000).
15. For an argument that contextualises financial governance within a global social formation, see
Susanne Soederberg, “On the Contradictions of the New International Financial Architecture: Another
Procrustean Bed for Emerging Markets?”, Third World Quarterly, Vol. 23, No. 4 (2002), pp. 607– 620.
16. See, for example, Geoffrey Ingham, Capitalism Divided? The City and Industry in British Social
Development (London: Macmillan, 1984); and his more recent “Capitalism, Money and Banking: A Cri-
tique of Recent Historical Sociology”, British Journal of Sociology, Vol. 50, No. 1 (1999), esp. pp. 77–81.
76 R. D. Germain
the consequent relationship between finance, risk and governance. By including

class relations as an essential building block of our understanding of governance,
a richer and more historically sensitive explanation of the puzzle of financial gov-
ernance can be crafted.
There is arguably one final causal force that should be flagged here, namely the
role of ideas and culture in the construction of what one scholar has called “webs
of governance”.17 A large and fluid debate about the role of ideas in constructing
an understanding of governance in general terms has emerged in recent years.18
Here it is worthwhile noting that this debate turns in part on a definition of
ideas, and in part on the role attributed to ideas in terms of the material construc-
tion of the global political economy. Although this debate has not been settled
definitively, it is clear that “ideas”—construed here as intellectually compelling
prisms through which we explain why the world works as it does—have

played an important contextual role in enabling certain agents to force the pace
of change in the modalities of financial governance. Indeed, for some observers
it is impossible to comprehend contemporary governance structures without con-
sidering the ideas lying behind the specific ways and means by which global
finance has been rendered “governable” over the past decades and centuries.19
Ideational conflict, and to a degree also the tension between different cultural
mores and norms (e.g. between Anglo-Saxon norms and so-called “Asian
values”), have been part and parcel of debates over appropriate governance struc-
tures in the global financial system. Even though ideas and cultural practices do
not themselves “act”, they prescribe, reinforce or undermine existing governance
arrangements; they are part of the social formation through which governance
works.20 Even if ideas are not an essential building block of financial governance,
they are certainly an important one.
Conceptual Schema
What conceptual schema adequately integrates the above building blocks? It must
be a schema or framework which gives due weight to each dimension of govern-
ance without privileging any particular one, unless a specific historical conjunc-
ture warrants this after close empirical examination. It must also be a schema
that highlights and emphasises the historical and evolving connections between
these building blocks. Furthermore, it must have a clear conception of the object
to be governed. In this case, what is particularly important to emphasise is the
inherently inter-subjective nature of finance, which is a social rather than a
17. Cerny, op. cit.
18. Representative examples within this debate include Judith Goldstein and Robert Keohane
(eds.), Ideas and Foreign Policy: Beliefs, Institutions and Political Change (Ithaca, NY: Cornell University
Press, 1993); Mark Blyth, “Any More Bright Ideas? The Ideational Turn of Comparative Political
Economy”, Comparative Politics, Vol. 29, No. 2 (1997), pp. 229–250; and Kathleen R. McNamara, The Cur-
rency of Ideas (Ithaca, NY: Cornell University Press, 1998).
19. Ronnie D. Lipshutz, Regulation for the Rest of Us? Globalization, Governmentality and Global Politics
(London: Routledge, 2005); Marieke de Goede, Virtue, Fortune and Faith (Minneapolis: University of
Minnesota Press, 2005); cf. Peter Miller and Nikolas Rose, “Governing Economic Life”, Economy and
Society, Vol. 19, No. 1 (1990), pp. 1 –31.
20. Nicholas G. Onuf, “Institutions, Intentions and International Relations”, Review of International
Studies, Vol. 28, No. 2 (2002), pp. 211–228.
material or objective resource. The credit that lies at the heart of finance does not
exist as an inert substance waiting to be extracted from the ground or fashioned
into a product in some factory. Rather, it is a resource that must be mobilised,
channelled and then reconstituted before its value can be realised, and each
stage of this complicated process is contingent upon the actions of human
agents who are embedded in social relations and use discursive language to
understand, construct and represent these resources.21 Understanding financial
governance thus demands that an interpretive, hermeneutic and historical con-
ceptual schema be employed.
One way of fashioning such a framework is by adapting the historical materialist
perspective developed over some years by Robert W. Cox.22 His framework rests on
an explicit reading of historical materialism derived from a range of Marxist and
non-Marxist sources that is historically sensitive, dialectical in its form of reasoning

and hermeneutic in its orientation. At the same time, his framework resists the urge
to reduce all forms of social organisation to a monochromatic reading of a single all-
powerful dynamic, such as class, mode of production, reason of state, anarchy, and
the like. Instead, what Cox seeks to develop is a conceptual schema which examines
specific “social formations” to discern the key dynamics that are interacting to
produce particular structures of relations at given points in time.23 Even though
Cox has been criticised for upholding a classical Marxist view on the necessity of
accumulating rather than creating credit,24 the contention here is that his frame-
work does not rule out embracing an understanding of global finance more in
line with that put forward here, precisely because of the emphasis which he
places on grounding his analysis in historically significant sets of social and insti-
tutional relations. Where we will have to adapt Cox’s schema is in providing a
closer consideration of the institutional changes within global finance that have
altered part of the governance problematic.
Another attraction of using a conceptual framework based on a Coxian-inspired
form of historical materialism resides in the explicitly global orientation around
21. Jonathan Kirshner, “The Inescapable Politics of Money”, in Jonathan Kirshner (ed.), Monetary
Orders: Ambiguous Economics, Ubiquitous Politics (Ithaca, NY: Cornell University Press, 2003); de
Goede, op. cit.; Germain, op. cit.
22. Most importantly in Robert W. Cox, Production, Power and World Order (New York: Columbia
University Press, 1987); Cox, Approaches to World Order, op. cit.; and Robert W. Cox, The Political
Economy of a Plural World (London: Routledge, 2002).
23. Cox here adopts Collingwood’s understanding of the historical method, in which “the events of
history are never mere phenomena, never mere spectacles for contemplation, but things which the his-
torian looks, not at, but through, to discern the thought within”. R.G. Collingwood, The Idea of History
(Oxford: Clarendon Press, 1946), p. 214. Helpful explications of Cox’s work in IPE include Timothy
Sinclair, “Beyond International Relations Theory: Robert W. Cox and Approaches to World Order”,
in Cox, Approaches to World Order, op. cit.; James Mittleman, “Coxian Historicism as an Alternative
Perspective to International Studies”, Alternatives, Vol. 23, No. 1 (1998), pp. 63– 92; and Michael
G. Schechter, “Critiques of Coxian Theory: Background to a Conversation”, in Cox, Political Economy
of a Plural World, op. cit. Critical engagements with Cox’s work can be found in Peter Burnham,
“Neo-Gramscian Hegemony and the International Order”, Capital and Class, Vol. 45, No. 1 (1991),
pp. 73–93; André Drainville, “International Political Economy in the Age of Open Marxism”, Review
of International Political Economy, Vol. 1, No. 1 (1994), pp. 105– 132; and Randall D. Germain and
Michael Kenny, “Engaging Gramsci: International Relations Theory and the ‘New’ Gramscians”,
Review of International Studies, Vol. 24, No. 1 (1998), pp. 3–21.
24. This is Strange’s implicit criticism of Cox’s work. See his engaging rejoinder, Robert W. Cox,
“Take Six Eggs: Theory, Finance and the Real Economy in the Work of Susan Strange”, in Approaches
to World Order, op. cit.
78 R. D. Germain
which it is framed. While the historical record of financial governance remains

largely national in character, contemporary developments have highlighted the
increasingly global and international aspects of governance, in particular
the way in which different forms of state are interacting to shape and influence
the boundaries and practices associated with how financial transactions are
organised and governed. Cox’s framework, by reaching for a political economy
explanation grounded in changing state – society complexes that are themselves
globally conceived, provides us with a suitable theoretical vantage point from
which to identify and bring together all of the essential causal forces involved
in producing governance arrangements, but without granting to any one a
trans-historical and causally privileged role.
What will this schema look like? It will take shape historically, by examining the
ways in which the causal forces identified above have become configured in the
contemporary period. It will look to each element of governance and ask what
new forces are shaping the trajectory of developments, with particular emphasis
upon the points of contestation between them. Within the context of the organis-
ation of global finance, we have to enquire into the organisational characteristics
of what some have termed the “new global finance”. By thinking about the
“new global finance” through the conceptual schema outlined above, the way
in which risk has emerged as a significant consideration in terms of the principles
of institutional organisation will become an increasingly critical attribute of
understanding the way in which governance is affected under contemporary
circumstances.
“New Global Finance” and the Political Economy of Risk

Decentralised Globalisation
At some point between the 1970s and the early 1990s, a turning point was reached
which eclipsed the major structural features of the Bretton Woods era. Although
the precise date of this eclipse is open to dispute, few contemporary scholars
deny that a new world of global finance has emerged.25 Three key structural fea-
tures define the new global finance—the size and scope of markets, the organis-
ation of public authority and the scale and form of institutions.
There is broad agreement that the size of financial markets today is without par-
allel, even if the levels of international capital flows in relation to the size of
national economies has only recently surpassed 1913 levels.26 For example, in
1999 the value of bond markets exceeded the value of the world’s gross domestic
product by some US$4 trillion (US$34 trillion to US$30 trillion), which in turn was
dwarfed by the magnitude of the derivatives markets (in 2004 these approximated
25. For a representative sample of this literature, see David Andrews and Thomas Willett, “Finan-
cial Interdependence and the State: International Monetary Relations at Century’s End”, International
Organization, Vol. 51, No. 3 (1997), pp. 479 –511; Benjamin Cohen, “Phoenix Risen: The Resurrection
of Global Finance”, World Politics, Vol. 48, No. 1 (1996), pp. 268 –96; Peter Dombrowski, “Haute
Finance and High Theory: Recent Scholarship on Global Financial Relations”, Mershon International
Studies Review, Vol. 42, No. 1 (1998), pp. 1–28; Jonathan Kirshner, “The Study of Money”, World Politics,
Vol. 52, No. 3 (2000), pp. 407 –436. As will be made clear below, I do not necessarily emphasise all of the
features which these authors use to characterise the new global finance.
26. Paul Hirst and Grahame Thompson, Globalization in Question, 2nd edn (Cambridge: Polity Press,
1999).
US$500 trillion).27 These markets are not only large, they are also decentralised. In
contrast to the 19th-century global financial order, there is no clear single principal
financial centre that provides unambiguous direction and leadership to the
system as a whole.28 Yet, at the same time that they are decentralised, financial
markets are also global. They are linked instantaneously by advanced telecommu-
nications, which enable developments in one market to spill over into other
markets.29 In this sense, although many now consider financial globalisation to
be the chief hallmark of the world’s financial system,30 it is really the decentralised
nature of such globalisation that makes the contemporary organisation of credit so
novel. The world’s financial system is globalised and decentralised. It has no com-
manding centre but yet is everywhere driven by the same dynamics and linked
together by the seamless operations of globe-spanning firms. This condition has
been labelled “decentralized globalisation”.31
Public authorities have not been a quiescent partner in the emergence of the new
global finance.32 There are two novel aspects about the contemporary organisation
of public authority worthy of note. The first is the new modus operandi established
between state organs and financial institutions. States have in part responded to the
evolution of the financial system by devolving regulation downwards to private
financial institutions.33 On one hand, governments have made financial institutions
themselves more responsible for ensuring that their activities meet appropriate pru-
dential standards for the institution on a consolidated basis. This trend has been
enabled by the development of new and sophisticated risk management models
that can—within certain parameters—assess the risk profile of a financial insti-
tution.34 At the same time, this new modus operandi has been pushed on to govern-
ments by the recognition that in a world of linked global credit markets they can no
longer keep tabs on the worldwide operations of financial institutions. Their sol-
ution is to place responsibility for meeting prudential standards in the hands of
those closest to the activities themselves, namely financial institutions. This
requires, among other things, that all of the ancillary services that contribute to
meeting prudential standards, such as legal, accounting, research and credit
27. Niall Ferguson, The Cash Nexus: Money and Power in the Modern World, 1700–2000 (London:
Penguin, 2001), p. 279; Bank for International Settlements, Triennial Central Bank Survey of Foreign
Exchange and Derivatives Market Activity (Basle: Bank for International Settlements, 2005).
28. Germain, International Organization of Credit, op. cit.; Langley, op. cit.
29. Technology requires an enabling political environment for much of its effectiveness, and the
march of liberalisation across developed and emerging market economies has been an important
aspect of the provision of this enabling environment. It is part of the argument of those advocating
the “new global finance”; however, to a certain extent that technology now operates independently
of political control (see, for example, Susan Strange, Mad Money, Ch. 2).
30. Ferguson, op. cit., Ch. 10.
31. Germain, International Organization of Credit, op. cit.
32. For treatments of the role of public authority—usually construed as state activity—in the emer-
gence of the new global finance, see Eric Helleiner, States and the Reemergence of Global Finance (Ithaca,
NY: Cornell University Press, 1994); Ethan Kapstein, Governing the Global Economy (Cambridge, MA:
Harvard University Press, 1994); Germain, International Organization of Credit, op. cit.; Pauly, Who
Elected the Bankers, op. cit.; Strange, Mad Money, op. cit.
33. Stephen L. Harris, “Regulating Finance: Who Rules, Whose Rules?”, Review of Policy Research,
Vol. 21, No. 6 (2004), pp. 743 –766.
34. See Andrew Crockett, “The Theory and Practice of Financial Stability”, Princeton Essays in Inter-
national Finance, No. 203 (1997); but see de Goede, op. cit., for a discussion of the problems associated
with the kind of knowledge that underpins these models.
80 R. D. Germain
rating services, are themselves credible, reliable and legally culpable. This new
modus operandi will be explored in more detail below.
Public authority, however, is not being reorganised solely in terms of its relation-
ship with private financial institutions. The second novel aspect of the organisation
of public authority has been its international reconfiguration during the post-
Bretton Woods era. Although some scholars continue to argue for the existence of
American hegemony or dominance over the world’s economic and financial
system, there are strong arguments for a reconsideration of this position.35 In par-
ticular, the existence of large, liquid credit markets in Europe (mainly London)
and Asia (Hong Kong, Tokyo and Singapore) mean that the United States no
longer has guaranteed access to international capital; rather, it must compete for
that capital and draw it towards the American economy, in much the same way
that London shifted from a deposit-attracting to a deposit-compelling stance after the

First World War.36 The position of the United States as a net importer of capital
(and overall a net international debtor) indicates that it has thus far been successful,
but at the same time it must be recognised that this is a negotiated rather than a
“naturally occurring” position. While American capital markets remain key
credit markets within the global financial system, they no longer determine the tra-
jectory of that system, and they might even be in the process of becoming hostage to
it.37 Despite the global reach of American legislation and regulatory norms in the
development of standards and codes used by the international community to
gauge the soundness of financial systems around the world,38 what has changed
is the automatic deference to American preferences around the world. Internation-
ally negotiated codes are now more clearly the product of sustained discussion that
reflects the needs and preferences of states other than the United States in a fuller
manner.39 A clear example of this process is the current discussions for a sovereign
debt rescheduling mechanism, which has been consistently resisted by the United
States but which many observers now believe is an inevitable development.40
35. See, for example, Stephen Gill, Power and Resistance in the New World Order (London: Palgrave,
2003).
36. David Williams, “London and the 1931 Financial Crisis”, Economic History Review, 2nd series,
Vol. 15, No. 3 (1963), pp. 513– 528; William A. Brown, The International Gold Standard Reinterpreted:
1914– 34 (New York: AMS Press, 1940/1970), Ch. 21.
37. For example, Alan Greenspan has repeatedly questioned the sustainability of the US current
account deficit and the propensity of foreigners to fund it, even though he has not yet labelled this
unsustainable. See, for example, his remarks before the Council on Foreign Relations in New York
on the subject of globalisation and the American current account deficit, available at: <http://www.
federalreserve.gov/boarddocs/speeches/2005/20050310/default.htm> (accessed April 15, 2005).
38. On the role of private institutions in the construction of global norms, see Eleni Tsingou, Trans-
national Policy Communities and Financial Governance: The Role of Private Actors in Derivatives Regulation,
Working Paper No. 111/03 (Warwick: Centre for the Study of Globalisation and Regionalisation, 2003);
Michael R. King and Timothy J. Sinclair, “Private Actors and Public Policy: A Requiem for the New
Basel Capital Accord”, International Political Science Review, Vol. 24, No. 3 (2003), pp. 345–362. One
may also cite the increasingly determined efforts of US law enforcement officials to extend the reach
of American law to foreign nationals who stand accused of engaging in corporate malfeasance while
previously working in the United States for foreign corporations. See, for example, “The Long Arm
of American Law”, The Economist (14 May 2005), p. 67.
39. Porter, op. cit.; Randall D. Germain, “Global Financial Governance and the Problem of
Inclusion”, Global Governance, Vol. 7, No. 4 (2001), pp. 411–426; but for counter-arguments see
Soederberg, op. cit.; and Best, “From the Top Down”, op. cit.
40. Barry Eichengreen, Financial Crises and What to Do About Them (Oxford: Oxford University Press,
2002).
Changes in the structure of markets and the organisation of public authority

have been central to the emergence of the new global finance. Some also call atten-
tion to parallel developments in the global class structure as an important com-
ponent of these changes. Crucial here is the transnationalisation of a managerial
class that has concentrated decision making within globally active firms into an
increasingly homogeneous class, and the consolidation of an ideational consensus
around a set of liberal or neo-liberal precepts that have elevated markets and
market efficiency as the key hallmarks of social organisation.41 Such class-based
developments help to explain why markets have grown in the way that they
have, and how forms of state have moved to defend, entrench and extend these
changes. By keeping these in view, we also maintain a stronger sense of how
the new global finance is embedded within broader socio-political developments
associated with global capitalism.

Changes in class relations also help us to understand the evolving character of
financial institutions themselves. Whether we look at the interlocking connections
between financial firms, either in the form of mergers and acquisitions or overlap-
ping directorships, or at lobbying efforts made by industry associations to govern-
ments, the changing balance of class forces allows us to embed market
developments and state–market relations into the broader trajectory of global capit-
alism.42 For example, part of the reason why governments such as the United States
are devolving regulatory control to private financial institutions is precisely because
these institutions and their industry associations have been successful in promul-
gating arguments on behalf of competitiveness and market efficiency, often directly
in opposition to representations by consumer and labour groups.43 The World
Economic Forum may be considered another example—in a long line stretching
from the Rhodes/Milner group through the Bilderberg meetings to those of the
Trilateral Commission—of the power of dominant classes (or relevant class
fractions) to organise themselves in a way which most successfully advances
their own self-interest.44 In different ways these developments resonate with Karl
Polanyi’s observation that 18th century laissez-faire capitalism was planned.45
Institutions and the Political Economy of Risk

Within this context, the final characteristics of the new global finance to be
reviewed here are changes within the institutional organisation of finance itself.
These institutions are becoming increasingly innovative in the kinds of activities
they pursue. As a result of technology, a more permissive political environment
and changes in the behavioural incentives produced by their regulatory environ-
ment, financial institutions are constantly developing innovative activities that
create new revenue streams and extend their activities into new areas. The
41. W.I. Robinson and J. Harris, “Towards a Global Ruling Class? Globalization and the Transna-
tional Ruling Class”, Science and Society, Vol. 64, No. 1 (2000), pp. 11–54; Leslie Sklar, The Transnational
Capitalist Class (Oxford: Blackwell, 2001).
42. Cox, Approaches to World Order, op. cit., p. 298.
43. Geoffrey R.D. Underhill, “The Public Good versus Private Interests in the Global Monetary and
Financial System”, International and Comparative Corporate Law Journal, Vol. 2, No. 3 (2000), pp. 335 –359.
44. Kees van der Pijl, Transnational Classes and International Relations (London: Routledge, 1998); see
also his earlier work, The Making of an Atlantic Ruling Class (London: Verso, 1984).
45. Karl Polanyi, The Great Transformation (Boston: Beacon Press, 1944/1957), p. 141.
82 R. D. Germain
kinds of financial institutions taking part in global finance have also changed dra-
matically—accounting firms, legal firms, pension trusts, insurance firms, mutual
funds or unit trust investment vehicles, hedge funds; all of these are now indelibly
associated with the organisation and operation of the global financial system. Col-
lectively they are bringing together, in unprecedented ways, those who require
capital with those who possess it.
There is, of course, a murky underside to this development, namely the finan-
cial engineering which has played such a prominent role in undoing corporate
giants like Enron, MCI/Worldcom and Parmalat.46 Yet for every nefarious use
to which these kinds of products and developments are put, there is another
more healthy use that enables firms and governments today to offset or price
risk in ways that are far more efficient than the traditional banking practice of
matching savers with borrowers. The spectre of financial engineering—which

has, of course, long haunted finance, witness the Dutch tulip bulb mania of the
17th century—should alert us to the fertile role of innovation, risk and information
in finance today.47 Financial innovation is driven by the desire to repackage and
control risk—understood here as the trade-off between certainty of return and
the specific reward on offer—which in turn places a premium on using quality
information in new ways.
In this sense, these “new” financial institutions must be understood primarily as
organisations that establish, price and allocate the risks associated with buying,
holding and selling financial assets. Banks have historically done this by using
the information they gather on savers and borrowers to match deposits with
loans. More recently, however, they and other kinds of financial institutions
have also used information about the demand for certain kinds of financial
assets to craft products that better match the risk profiles and liquidity preferences
of their clients (both those who have and those who need capital). Moreover, these
profiles and preferences are themselves bound up with the changing structure of
incentives that firms face with respect both to the markets and the regulatory
environments in which they operate.
The role of risk in the pricing and design of financial products has meant a pro-
liferation in the forms of credit available both to invest in and purchase. Highly
specialised financial instruments can now be designed—with either creditors or
borrowers in mind—to cover any time frame and to address most forms of risk,
whether associated with foreign exchange, interest rates, price changes or credit
defaults. Consequently, those financial markets associated with non-bank credit
instruments have enjoyed spectacular growth in recent years, which has in turn
produced a credit market structure organised around the principle of disinterme-
diation, where investors and consumers of credit engage directly with each other
through independent arm’s-length transactions. Disintermediation privileges
capital markets at the expense of traditional credit (i.e. lending) markets, just as
46. Cox and others have also noted how recent changes in the organisation of the world’s financial
system feed the growth of the covert or criminal worlds. See, for example, Cox, Political Economy of a
Plural World, op. cit., Ch. 7; and Susan Strange, The Retreat of the State (Cambridge: Cambridge Univer-
sity Press, 1996), Ch. 8.
47. See Charles P. Kindleberger, Manias, Panics and Crashes, 3rd edn (London: Macmillan, 1996),
pp. 100–101, on the Dutch tulip bulb mania; and Susan Strange, “Finance, Information and Power”,
Review of International Studies, Vol. 16, No. 3 (1990), pp. 259–274, on the structural role of information
and innovation in global financial politics.
it provides a firm incentive structure for the operation and development of new
financial products. Some have even argued that this new financial structure has
produced new forms of knowledge concerning the organisation of credit.48
A clear argument can therefore be made that risk today stands at the heart of
financial innovation, and that institutions at the centre of global financial activity
are now organised primarily to price and allocate risk according to the demands of
different categories of consumers. Risk is thus the key means by which financial
products are devised and sold. Risk has also come to occupy a central concern
for regulators because it contains a structure of costs and payoffs that shift the
balance of penalties and rewards among players, both directly and indirectly.
This structure may be called the political economy of risk, and carries three
important implications with respect to governance.
The first implication is that risk has become synonymous with the use and
manipulation of information, which in turn demands very high levels of formal
knowledge and training. This not only makes customers (both providers and con-
sumers of credit) vulnerable to receiving fair treatment from their financial insti-
tutions but also sets financial institutions apart from their regulators, simply
because they are in a position to outspend regulators on salaries and the provision
of information-rich resources. In terms of governance, then, one implication of the
political economy of risk is that it signals an instrumental power shift away from
regulators and towards those with substantial resources to devote to using and
manipulating information.49
The second implication to note about the political economy of risk in the new
global finance is that financial stability itself has become subject to a new and
enhanced type of vulnerability that arises directly as a result of the capacity to
repackage and transfer risk. By “securitising” different kinds of revenue and
payment streams and transferring them to different parts of a firm’s balance
sheet (or offloading them altogether), or by moving assets and liabilities to special-
ised financial vehicles in ambiguous regulatory relationships to their parent com-
panies, institutions can (from a regulatory perspective) transfer risk “off balance
sheet”, so that particular funds are not included among the assets and liabilities
for which a firm is responsible. But by doing this it is more difficult to identify
accurately and take account of the overall risk that such institutions may face,
much less how systemic risk should be calibrated. A good example was the
manner by which Enron was able to conceal from regulators the true extent of
the risk within its own portfolio of assets and liabilities.50 The main worry here
must be the off-balance sheet risks held by major financial institutions, whose
48. Timothy J. Sinclair, “Reinventing Authority: Embedded Knowledge Networks and the New
Global Finance”, Government and Policy, Vol. 18, No. 4 (2000), pp. 487 –502; Adam Tickell, “Dangerous
Derivatives: Controlling and Creating Risks in International Money”, Geoforum, Vol. 31, No. 1 (2000),
pp. 87 –99.
49. One concrete indicator of a power shift towards institutions that manipulate information is the
enhanced role of credit rating agencies as organs of governance. See Timothy J. Sinclair, The New Masters
of Capital: American Bond Rating Agencies and the Politics of Creditworthiness (Ithaca, NY: Cornell Univer-
sity Press, 2005).
50. Of course it should be pointed out here that as a “non-financial” institution Enron was subject to
a more lenient set of regulatory statutes governing its financial transactions. The unevenness of regu-
lation covering “financial” versus “non-financial” firms—despite the fact that both types can be heavily
involved in the same kinds of financial transactions—is an important problem that cannot be addressed
here.
84 R. D. Germain
sudden failure could place in jeopardy the financial resources of many other firms.
With reference to governance, therefore, a second aspect of the political economy
of risk is that it increases the vulnerability of the financial system itself to large
swings in the value of assets which are not clearly (from a regulatory point of
view) linked to the current performance of a given financial institution.
The final implication to note is that with the new and enhanced profile of “risk
products”, financial institutions themselves have become much more dependent
upon their reputations as a way of distinguishing one institution from another.
On one hand, because financial institutions are so much more information rich
and knowledgeable than their customers, it is their reputation or “brand” that cus-
tomers rely on as a guide to choosing financial institutions. They cannot know the
“rocket science” behind the “risk products” themselves so they must rely on the
apparent integrity of financial institutions for the veracity of this knowledge.

Thus the reputation of these institutions becomes both their greatest strength
and their Achilles heel. If that reputation becomes damaged, it is difficult to
recover, as the accounting firm Arthur Andersen discovered in the aftermath of
the Enron debacle.
On the other hand, because of increased disintermediation, financial insti-
tutions rarely fund their own activities with deposits; instead, they design pro-
ducts for others or get access to capital markets directly to purchase credit for
their own use. This means that there are many more financial institutions involved
in global financial markets today than in the past, reinforcing the importance of
their reputations, precisely to distinguish them from their many competitors.
The third aspect of the political economy of risk to note, therefore, is that it
makes individual institutions increasingly vulnerable to reputational consider-
ations, and this provides public authorities with an effective form of leverage in
their attempts to regulate financial institutions appropriately.
The overall result of the new global finance, therefore, has been to reconfigure
the political economy of risk in terms of financial institutions themselves, thereby
enabling a shift towards a more market-oriented form of governance, both as a
necessity and as a possibility. This shift has been necessary in so far as an infor-
mation-rich sector of the economy has outstripped the capacity of regulators to
monitor their activities in a timely and effective manner. The institutions are so
big or are active in markets that are so deep and liquid and decentralised that it
is practically impossible for a limited number of regulators to scour the books
and market activities to ensure compliance with the large number of extant
rules and regulations. Moving towards a governance regime that sets standards
and procedures for institutions to follow in order to evaluate and contain their
own levels of risk acknowledges this impossibility, while at the same time
attempting to ensure that institutions remain subject to evolving standards of pru-
dential supervision.
These standards in turn have been able to be set partly because of the possibility
of harnessing market discipline in the provision of financial governance. In terms
of prudential supervision, market discipline works both because of the pressure
exerted by collective behaviour on profit margins and market share and
because of the reputational considerations of financial institutions. In important
ways it pays for these institutions to be guided by prudential regulations that
are clear indicators of a high-quality reputation. Public authorities, by devising
prudential regulations that provide strong incentives apart from legal sanction
for their adherence, can thus make market discipline work to guide individual
institutional activity. One example of such a prudential regulation is capital ade-
quacy requirements, which tell potential customers that a financial institution has
a capital cushion to protect itself in case of unexpected developments, and is there-
fore more likely to be a soundly run institution.
The new global finance, then, has three interlinked structural features that set it
apart from its antecedents. At one level it is characterised by decentralised globa-
lisation, where no single financial centre is able to provide guidance and direction
to the entire global financial system. There are multiple centres that serve as nodal
points for the operations of globally oriented financial institutions. Credit markets
have also taken on a life of their own; that is, they are no longer closely connected
to actual trade in goods and services in the global economy.51 At another level, the
new global finance is not dominated by a single financial power as the Bretton
Woods era was dominated by the United States. Although the United States
remains the single most influential public authority within the global financial
order, it can no longer impose its preferences and demands unilaterally upon a
pliant world, even if its voice remains extremely powerful.52 Finally, the multiple
forms that financial institutions take are without historical precedent—the decen-
tralised yet globalised organisation of credit markets has produced a staggering
operational differentiation among financial institutions. At the heart of this oper-
ational differentiation is the repackaging of risk, which has in turn made the col-
lection, analysis and distribution of information one of the core activities of
financial institutions. Creating value through the use of information is therefore
one of the defining hallmarks of the “new global finance”.
Finance and Risk: Implications for Governance

Globalising Governance
In his book Production, Power and World Order, Robert W. Cox argued that the struc-
ture of world order during the 1980s was in the process of a transformation that
had not yet run its course. One of the determining causal forces that would
shape this transformation was global finance, the “pre-eminent agency of confor-
mity to world-hegemonic order and the principal regulator of the political and
productive organization of a hegemonic world economy”.53 Twenty years on
from the publication of this path-breaking work we are in a position to begin to
assess how far the transformation that Cox was examining has run.54 While some
maintain that the structure of world order has become consolidated in terms of a
hegemonic neo-liberal historical bloc—or neo-liberal globalisation—with the
51. This claim was first raised by Peter Drucker, “The Changed World Economy”, Foreign Affairs,
Vol. 64, No. 4 (1986), pp. 768 –791, and explored more recently by Anastasia Nesvetailova, “The
Logic of Neoliberal Finance and Global Financial Fragility: Towards Another Great Depression?”,
Research in Political Economy, Vol. 21, No. 1 (2004), pp. 61–90.
52. Germain, “Global Financial Governance”, op. cit.; Porter, op. cit.
53. Cox, Production, Power and World Order, op. cit., p. 267.
54. Cox himself outlines several different future scenarios of world order development, in line with
his assessment of the possible contingencies contained within the structural conjuncture of the 1980s. I
am here concerned primarily with the fulfilment of what he identified as the hyper-liberal state model,
or what critical theorists now generally agree is a form of “disciplinary” neo-liberalism. This usage
comes from Gill, op. cit., Ch. 7.
86 R. D. Germain
United States at its core, the argument developed here maintains that the structure
of world order and the modalities of financial governance embedded within it
remain in essence non-hegemonic.
There are two grounds upon which this claim is made. First, the institutional
developments adumbrated above do not necessarily lead to the conclusion that
financial governance is marked completely by neo-liberal precepts, even if they
are abundantly in evidence. The crucial point to note here is that public authorities
have abandoned neither their intention nor their capacity to oversee financial
institutions. In fact the shift towards having institutions increasingly govern
themselves subject to prudential oversight from relevant authorities has been
able to take hold only because of—not in spite of—changes in the global financial
environment. States still maintain a repertoire of governance capabilities that will
long involve them in financial affairs. This is neither to deny that new vulnerabil-
ities have presented themselves nor to admonish states for being ill-prepared to
meet these vulnerabilities. Rather, it is to reinforce the position that public auth-
orities will not quickly abandon the capacity to act financially when broader, sys-
temic interests come into play.
The second reason for arguing that a non-hegemonic structure of world order
persists lies in acknowledging the strength of the barriers that continue to stand in
the way of the full triumph of the kind of disciplinary neo-liberalism that theorists
such as Stephen Gill and William Robinson, with some caveats, see unfolding.55
Here we can point to several barriers to neo-liberalism that a Coxian historical
materialist framework identifies, including inter-state politics, intra-class struggles
and the limits to neo-liberalism provided by the organisation of competing state/
society complexes. A close consideration of these barriers indicates that, despite
the increasingly important role of risk in global financial transactions, a plural
world of state/society complexes has not yet exhausted itself and been consigned
to the rubbish heap of history.
The capacity of states to involve themselves in the regulatory framework of
financial institutions is nowhere on better display than in the renewed import-
ance which prudential supervision holds for financial governance. For example,
the debate over capital account liberalisation now openly acknowledges that
prudential supervision must meet certain minimum standards before liberalisa-
tion can proceed effectively. Opening the capital account up without also ensur-
ing that financial institutions are able to withstand sudden changes in their
liquidity positions can place undue vulnerabilities on financial systems, includ-
ing the cost of recovery from financial crises. This is increasingly significant
given the enhanced range and scale of financial transactions made possible by
the new global finance. Similarly, deregulation and enhanced foreign compe-
tition make no sense in the absence of a healthy domestic financial system,
which in turn cannot be achieved without adequate levels of prudential super-
vision. It is no longer the case that full-scale financial liberalisation is the
optimal goal, and that prudential supervision is subject to a “drive to the
bottom”. Instead, in areas as diverse as capital account liberalisation, money
laundering and offshore financial centres, we have witnessed what Philip
55. Gill, op. cit.; William I. Robinson, A Theory of Global Capitalism: Production, Class and State in a
Transnational World (Baltimore, MD: Johns Hopkins University Press, 2004).
Cerny has called the “competition state” ratcheting up the levels of supervision
rather than the reverse.56
To understand why this is so involves returning to one of the implications of the
political economy of risk identified above, namely the role of reputational con-
sideration. Designing prudential supervisory guidelines to appeal to the reputa-
tions of globally active financial institutions works precisely because of the
enhanced value of an institution’s reputation in an information-rich world.
Where institutions devise and market highly idiosyncratic and innovative risk
products whose value can swing wildly based on the movements of multiple
and not always connected indicators, what (except for their reputation) do poten-
tial customers have on which to base their selection criterion? By targeting this
reputation, supervisors can lead institutions to balance their activities in such a
manner as to help contain systemic risk. This is, of course, one of the central
ideas lying behind the risk models now used to assess the likelihood of cata-
strophe for institutions as a whole.57 But it also lies behind the increasingly stri-
dent legal manoeuvres undertaken by public authorities such as Elliot Spitzer,
former Attorney General of the State of New York. By targeting effectively the
reputations of entire industries such as mutual funds (unit trusts in the United
Kingdom) or insurance, he has been able to ratchet up several aspects of
state-based prudential supervision in the United States.58
Interestingly, there has been a growing global dimension to this process. Well-
known international financial institutions such as the International Monetary
Fund (IMF) and the World Bank, along with less well-known institutions such
as the Bank for International Settlements (BIS), the Financial Stability Forum
(FSF), the International Organisation of Securities Commissions (IOSCO) and
the Organisation for Economic Cooperation and Development (OECD) have
become central organs of coordination for this global process. In other words,
although prudential supervision continues to be delivered through national auth-
orities and within the context of national jurisdictions, the development of a policy
framework associated with prudential supervision has become increasingly glo-
balised. We might even boldly acknowledge the formation of a global policy-
making process.59 Whether it is the development of core principles of banking
supervision or core standards for data dissemination, a global policy development
process that includes a wide cross-section of industrialised and emerging market
economies is now active. This not only represents the return of prudential super-
56. See, for example, Vincent Sica, “Cleaning the Laundry: States and the Monitoring of the Finan-
cial System”, Millennium, Vol. 29, No. 1 (2000), pp. 47–72; Philip G. Cerny, “Restructuring the Political
Arena: Globalization and the Paradoxes of the Competition State”, in Germain (ed.), Globalization and its
Critics, op. cit.; and Ralf J. Leiteritz, “Explaining Organizational Outcomes: The International Monetary
Fund and Capital Account Liberalization”, Journal of International Relations and Development, Vol. 8,
No. 1 (2005), pp. 1–26.
57. These VAR (value-at-risk) models clearly have their limits, but they also enable institutions to
monitor their overall risk profiles much more effectively than in the past. For a discussion of some of the
limits of these models, see de Goede, op. cit., pp. 138 –139; and Mark Blyth, “The Political Power of
Financial Ideas: Transparency, Risk and Distribution in Global Finance”, in Kirshner, Monetary
Orders, op. cit.
58. “Survey of International Banking”, The Economist (21 May 2005), pp. 9–10.
59. For discussions of this emerging policy-making framework see in addition to the sources
quoted in footnote 2, Porter, op. cit.; Layna Mosley, “Attempting Global Standards: National Govern-
ments, International Finance, and the IMF’s Data Regime”, Review of International Political Economy,
Vol. 10, No. 2 (2003), pp. 331 –362.
88 R. D. Germain
vision to the front rank of financial governance concerns but also indicates that
prudential supervision has indeed “gone global”.
The growing globality of financial governance will in turn reduce the overall
prominence of American influence in three ways. First, the range of financial inter-
ests arrayed against the stake which American financial institutions and the US
government have in the current organisation of the global financial system is
large and growing. While American influence in the major international financial
institutions such as the IMF and World Bank remains robust, its influence in the
plethora of other financial governance institutions can no longer be taken for
granted. This is not to say that American influence is absent, merely that it is
now one among several competing factors, and by no means overwhelming.
Thus we have had movement on sovereign debt rescheduling, limited reform of
the IMF itself, and a retreat on the blanket condemnation of capital controls
(alongside a slowing down of the pace of financial liberalisation), all of which
have been resisted or supported only half-heartedly by successive US adminis-
trations.60 The US government and financial institutions may continue into the
near-term future to hold a veto over certain developments in the structure of
financial governance, but they do not dictate the entire agenda of reform as
they have done in the past.
It is also important to recognise the growth of the political importance of China
and India in global financial arrangements and their determined efforts to curtail
what they see as malign American influences on their domestic financial systems.
India’s refusal to countenance meaningful foreign ownership of domestic banking
institutions, and China’s halting liberalisation strategy, both attest to active resist-
ance to the imposition of US-inspired global banking norms. As a result, the finan-
cial systems of two of the world’s fastest growing economies are less open, less
liberal, and less subject to global pressures than most developing countries.
Second, there are indications of growing intra-class tensions that—while at
present relatively innocuous—could conceivably develop in a sharper and more
protracted direction. One tension concerns the conflict of interest between
large-scale financial institutions and small and medium-sized industry over the
question of access to credit. The development of major financial institutions into
purveyors primarily of risk products has left many small and medium-sized
businesses with reduced access to adequate levels of affordable credit. Their
salvation lies in lobbying governments either to induce financial institutions to
service their needs or to provide for such financing through para-statal banks,
and could in all likelihood result in a reduction of the latitude of large financial
institutions in relation to their environment. Small and medium-sized businesses
can also lobby for a more effective competition policy in the provision of financial
services, precisely to allow new entrants into the system who might better serve
their needs. Whichever strategy they pursue, one likely effect of this intra-class
tension is to erect some limits to what large-scale globally oriented financial
institutions can do in some parts of their home markets, even if only on the
margins. This process is most advanced in the United States, with its history of
ambivalence towards “big capital” and banks in particular, but it is also evident
across the European Union.61
60. Leiteritz, op. cit; and Eichengreen, Financial Crises and What to do About Them, op. cit.
61. See, for example, Harris, op. cit.
Another intra-class tension cuts along the lines of industry-wide competition. In

the 1980s this tension played itself out in terms of a struggle between American
and Japanese banks, but in the early years of the 21st century it is both national
in orientation and sectoral.62 As American banks have merged and expanded
aggressively throughout the world during the 1990s, they have waged pitched
battles over market share and high-priced human talent around the globe.
These battles have left many scars, and have prompted a defensive wave of
mergers in many countries that have produced a limited number of colossal
banks competing in global financial markets. But equally important has been
the nature of the mergers that have occurred over the past 20 years, together
with a relaxation in the rules governing what kinds of financial institutions can
compete in which markets. The result today is that, unlike in the early Bretton
Woods period and before where market segmentation allowed small groups of
firms to dominate specific markets, there is no longer a single dominant type of
globally active financial institution. Rather, there are many different types active
across a range of different markets, representing what Kees van der Pijl calls frac-
tions of capital.63 This cross-sectoral competition—as, for example, between insti-
tutions involved primarily in mergers and acquisitions versus those involved in
derivatives or corporate bond issuances or reinsurance—produces many tensions
both between the interests of different class fractions and between public auth-
orities charged with overseeing their activities. The end result is a fragmentation
of what might be viewed as the “hegemonic” conception of global finance.
Finally, we must not lose sight of the continuing tensions that different state/
society complexes bring to the world’s financial system. While it is undeniable
that a global layer of financial activity exists and is extremely influential in
being able to affect the financial systems of many countries, it is also true that
for most countries the vast bulk of financial activity is domestically oriented.
This means that the particular kind of state/society complex that interposes
itself between finance and the domestic economy has an important effect on the
broader organisation of credit. John Zysman long ago pointed out the intervening
role played by financial systems in enabling or disabling governments to deal with
changing economic conditions,64 but the reverse proposition is also valid, namely
that state/society complexes impose themselves on the ability of financial systems
to adapt to changing circumstances.65 The case of China is today perhaps the
starkest reminder of this social fact. The Chinese financial system has evolved
for 50 years as an adjunct to the central planning goals of the Chinese Communist
Party and state, yet now it finds itself expanding abroad precisely in order to
62. Germain, International Organization of Credit, op. cit. See also Eric Helleiner, “Money and Influ-
ence: Japanese Power in the International Monetary and Financial System”, Millennium, Vol. 18, No. 3
(1989), pp. 343 –358.
63. Van der Pijl, op. cit., pp. 49– 57.
64. John Zysman, Governments, Markets and Growth (Ithaca, NY: Cornell University Press, 1983).
65. One could also add here the growing participation in global financial developments of what Jan
Aart Scholte and Albrecht Schnabel have called civil society, non-state groups and movements that are
increasingly becoming a factor in global economic governance arrangements. Jan Aart Scholte and
Albrecht Schnabel (eds.), Civil Society and Global Finance (London: Routledge, 2002). For slightly
wider ranging discussions see also Robert O’Brien, Anna Marie Goetz, Jan Aart Scholte and Marc Wil-
liams, Contesting Global Governance: Multilateral Economic Institutions and Global Social Movements (Cam-
bridge: Cambridge University Press, 2000); and Randall D. Germain and Michael Kenny (eds.), The Idea
of Global Civil Society: Politics and Ethics in a Globalizing World (London: Routledge, 2005).
90 R. D. Germain
service a growing layer of globally active Chinese businesses. Moreover, it is doing

so largely as an adjunct to the Chinese state. Japanese banks have also for many
years been both private-sector enterprises and delivery vehicles for Japanese
industrial policy. Indeed, it is perhaps not possible to explain the enormous pur-
chases of American Treasury bills by Japanese banks throughout the 1980s and
1990s except as part of an implicit bargain between finance and the state in
Japan to support American security policy in Asia. While the latter example indi-
cates a fairly clear deference to American global financial interests, not all state/
society complexes will incline their financial institutions to behave in similar
ways. We can expect growing intra-class tension, therefore, to arise out of the
normal workings of financial markets, and for this tension to act as a check on
the role and influence of US government and financial institutions.
The Limits of Global Financial Governance

Although the history of financial governance is largely national in scope, recent
developments have taken it in a global direction. At the same time, institutional
changes have led states and public authorities to adopt a more market-oriented
form of financial governance, working in part through the new reputational vul-
nerabilities of financial institutions in an information-rich age. The argument laid
out here is that these changes are part of a secular reduction in the overwhelming
dominance of the United States in the exercise of financial governance. By
outlining the structural underpinnings of the new global finance and the political
economy of risk it has brought into being, this article provides support for Cox’s
claim that the structure of world order remains effectively “non-hegemonic”.66
This claim, however, is not synonymous with the further claim that the global
financial system faces no immediate vulnerabilities, or that global financial gov-
ernance is problem free. In fact the global financial system faces two significant
vulnerabilities, to which the present structure of financial governance is poorly
equipped to respond. The first vulnerability relates to the present value of the
principal international currency, the US dollar. A sudden and precipitous drop
in its value could plunge the global economy into turmoil because it would
wreak havoc in the financial markets. The US dollar still accounts for a dominant
proportion of all foreign currency transactions, it is the international unit of
account for major commodities such as oil and gold, and, most importantly, it is
the principal store of value for governments and corporations the world over as
reflected in levels of US dollar-denominated assets being held by central banks
throughout the world. A collapse in its value would therefore significantly
decrease global levels of liquidity and place into jeopardy established trends of
international trade.
Yet, at present, the structure of global financial governance is ill-equipped to
address global currency vulnerabilities or imbalances. Attention has been paid
largely to strengthening the global mechanisms of prudential supervision rather
than ensuring smooth exchange rate adjustments. Put simply, there is very little
that is global in terms of exchange rate politics since overwhelmingly they
66. Cox, Political Economy of a Plural World, preface; see also recently Robert W. Cox, “Beyond
Empire and Terror: Critical Reflections on the Political Economy of World Order”, New Political
Economy, Vol. 9, No. 3 (2004), pp. 307–323.
remain determined by individual governments responding to political and

economic priorities as they see fit.67 Indeed, in the case of the United States, the
political and economic priorities being pursued by public authorities are highly
self-interested and focused on extracting from global economic relationships
maximum advantage for US interests narrowly defined. This is why domestic
and inter-state politics continue to have such a determining effect on financial gov-
ernance. For example, the refusal of successive US presidential administrations
from Richard Nixon onwards to effect a structural reduction in American govern-
ment deficits—with perhaps the unique exception of the later years of the Clinton
administration—has shifted the burden of economic adjustment from the United
States on to many developing countries, which paid a high economic price when
the US dollar rose precipitously in the early 1980s and then again when it fell
sharply in the early 1990s. A similar argument holds for the way in which the
United States has dealt with its large and growing current and capital account
imbalances. While America’s trade deficit has been a boon to many developing
countries since the 1970s (and certain industrialised countries such as Canada),
its capital account deficits helped to transmit American inflation to the global
economy in the 1960s and 1970s. Now, however, with a large and growing
capital account surplus, the United States is effectively consuming a dispropor-
tionate amount of global capital stocks in order to fund its trade and budgetary
deficits. The international role of the dollar is central to how these imbalances
will evolve. Yet the global machinery to unwind exchange rate mismatches has
lain largely dormant for 30 years.68
The second vulnerability concerns the need for international action in the face of
a global systemic financial crisis, otherwise known as an international lender
of last resort. As the 1994 Mexican peso crisis and the 1997/98 Asian financial
crisis revealed, there is very little in the way of consensus as to what the most
appropriate international response should be to a truly systemic global financial
crisis. Instead, a purely ad hoc system is in place, one that relies overwhelmingly
on selected governments stumping up actual resources to cover the breech.69
Major international financial institutions such as the IMF or the World Bank are
poorly equipped to undertake this task, both because their resources are insuffi-
cient and their mandates not responsive enough to the time-sensitive demands
made in such circumstances.70 The IMF experimented with a crisis prevention
line of credit after the Asian crisis—the Contingent Credit Line—but it was struc-
tured actively to dissuade potential countries from using it, and has since expired
without once being activated. It is not difficult to recognise the paradox that the
active dispersal of resources is central to sound financial governance in the face
67. C. Randall Henning, Currencies and Politics in the United States, Germany and Japan (Washington,
DC: Institute for International Economics, 1994). In many ways this applies also to the trajectory and
evolution of national currencies, namely that they are overwhelmingly the product of the political
and social history of individual nations. See Helleiner, The Making of National Money, op. cit.
68. The last concerted attempt to manage the dollar occurred in the mid-1980s, when finance min-
isters of the G5 countries tried to steer the dollar lower at meetings at New York’s Plaza Hotel and the
Louvre in Paris. See Eichengreen, Globalizing Capital, op. cit., Ch. 5; Yoichi Funabashi, Managing the
Dollar: From the Plaza to the Louvre, 2nd edn (Washington, DC: Institute for International Economics,
1989); and Strange, Mad Money, op. cit.
69. Goldstein, op. cit.; Eichengreen, financial crises, op. cit.
70. Ngaire Woods, “Making the IMF and World Bank More Accountable”, International Affairs, Vol.
77, No. 1 (2001), pp. 83–100.
92 R. D. Germain
of crisis, and that this type of activity is precisely the most difficult to achieve in
consort with others. Yet this is exactly the paradox that needs to be overcome
for financial governance to become fully globalised and responsive to problems
with potentially catastrophic consequences to the global financial system.
Conclusion
This article has advanced three interlinked sets of claims. First, a conceptual
schema adapted from Robert W. Cox’s version of historical materialism is the
most appropriate starting point for understanding financial governance at the
global level. This schema highlights four primary causal forces that are historically
related and together set the context within which governance is exercised. Second,
recent institutional changes within the global financial system have increasingly
led globally oriented financial institutions to become purveyors of “risk pro-
ducts”. This change in the scale and scope of global finance has produced a pol-
itical economy of risk that contains important implications for financial
governance. Third, the extent to which Cox’s claim that the structure of world
order is non-hegemonic can be illustrated with respect to the emerging modalities
of financial governance at the global level. Indeed, the problems confronting an
increasingly globalised structure of financial governance can be related to the con-
tinuing non-hegemonic condition of contemporary world order.
At the same time, the explicit focus on institutional change within the practices
of financial institutions calls into question the potential capacity of any single
financial institution to steer the global financial system. This is so for two
reasons. First, global finance has become decentralised at the same time as it
has become globalised. Power has become fragmented within a non-hegemonic
world order, meaning that no single source of authority can hold determinant
sway over the system as a whole. Second, the resurgence of the importance of pru-
dential supervision, when coupled with the reputational considerations of finan-
cial firms consequent upon their becoming purveyors of “risk products”, means
that public authorities have a renewed purchase on establishing appropriate over-
sight mechanisms, albeit ones which increasingly operate through rather than
against market operations.
In terms of conceptualising financial governance, this article questions those
analyses that associate governance with only private or public authorities, and
those that consider governance solely in relation to the consolidation of a neo-
liberal structure of world order. By conceiving of governance as being driven by
four principal causal forces, and by contextualising the development of a
market-oriented form of governance in terms of institutional changes connected
to the way in which risk is packaged, priced and allocated, an historical dialectic
has been preserved which refuses to see public authorities as being thrust aside
from the future of financial governance. Indeed, the increased vulnerability of
financial institutions to reputational considerations makes an effective form of
global prudential oversight both necessary and possible to achieve. At the same
time, even though financial governance can work through market mechanisms,
it must be organised and coordinated at a global level. This historical imperative
makes recent efforts at global capacity building so interesting and significant.
The extension of the G7 into the G8/9 (if China is more formally included), the
formation of the G20 group of finance ministers and the FSF, as well as the
numerous technical oversight committees that have been formed around the
IMF/BIS/World Bank/OECD nexus, are the new core of actually existing global
financial governance.
This is not to say that what happens within the US Treasury, White House,
Federal Reserve and Wall Street nexus are unimportant, for they feed into and
direct in important ways many of the issues associated with financial governance.
But what is important to recognise—historically and conceptually—is the novel
institutional developments in terms of world credit practices, the continuing
effects of a non-hegemonic structure of world order, and the new determination
of many outside of the United States to influence the rules and procedures by
which they and their financial institutions are governed. This is the brave new
world of global finance, and it is one whose complexities we are only beginning
to map conceptually.

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Global Finance, Risk and Governance

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Global Finance, Risk and Governance1

framework of historical materialism can be adapted to articulate a suitable conceptual

ISSN 1360-0826 print=ISSN 1469-798X online/07=010071–23 # 2007 University of Kent

Finance and Governance: Conceptual Building Blocks

central government but operating under a strictly defined mandate—they also

involved in the governance process. Institutions should be seen as a principal

the consequent relationship between finance, risk and governance. By including

prisms through which we explain why the world works as it does—have

non-Marxist sources that is historically sensitive, dialectical in its form of reasoning

which it is framed. While the historical record of financial governance remains

“New Global Finance” and the Political Economy of Risk

that London shifted from a deposit-attracting to a deposit-compelling stance after the

Changes in the structure of markets and the organisation of public authority

associated with global capitalism.

Institutions and the Political Economy of Risk

matching savers with borrowers. The spectre of financial engineering—which

apparent integrity of financial institutions for the veracity of this knowledge.

Finance and Risk: Implications for Governance

Another intra-class tension cuts along the lines of industry-wide competition. In

service a growing layer of globally active Chinese businesses. Moreover, it is doing

The Limits of Global Financial Governance

remain determined by individual governments responding to political and

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